Bree Mobley
Professor Kim Fortun
Sustainability Problems
Fall 2011 Debate paper: Is increasing profits the only social responsibility of business?
The establishment of the corporation in America dates back to colonial expansion in the 1600s and 1700s. It was modeled after European corporations that defined corporations as a collection of individuals whose focus and business was of the public interest. By the early 19th century, corporations were still closely regulated by the states; forming a corporation required an act of legislature. At that time corporations were required to comply with the purposed expressed in their original charters. However a shift began to occur as many successful private firms avoided the corporate model: Andrew Carnegie formed his steel operation as a “limited partnership” for example. In 1819, the U.S. Supreme Court grated corporations a number of rights they had never previously recognized. The corporation was labeled an “artificial person” possessing both individuality and immortality. Also, pressured by new British laws, America voted to establish limited liability meaning that any corporation could enjoy limited liability on both contract and torn claims simply by registering as a “limited” company with the appropriate government agency. These new laws allowed corporations to retain huge profits due to business not benefiting specifically the public, but rather their direct, immediate stakeholders. Now, we come now the present day question: is increasing profits the only social responsibility of corporations and business? This question is becoming even more of a pressing issue in America due to low employment rates, decreasing income of the middle class, and loss of production within our borders. In a speech given by President Obama in February 2011, he says “Businesses have a responsibility, too…They should set up shop here and hire our workers, pay decent wages, and invest in the future of this nation. That’s their obligation” (thehill.com).
The infamous economist, Milton Friedman, in his 1970 New York Times Magazine article titled “The Social Responsibility of Business is to Increase Profits” preaches the affirmative; he believes that businesses and corporations have no social responsibility beyond making a profit. Friedman presents his argument on the basis of the existence of a free enterprise, private-property system. A free enterprise system allows business to be governed by the laws of supply and demand, not restrained by government interference, regulation, or subsidy (investorwords.com). He says that in such a system, the only responsibility a corporation, or rather its corresponding corporate executive, has is to its employers; that responsibility being to make as much money as possible while conforming to the basic rules of society. A business’ employers take the form of stakeholders, investors, a board of trustees, sponsors, etc. Friedman argues that a business cannot be considered a human person and therefore cannot be expected to uphold certain responsibilities; “only people have responsibilities” (1). With this being said, when the phrase “social responsibilities of business…” is used, Freidman assumes that businessmen, or more specifically the corporate executives, are the ones who hold that responsibility and such responsibility should not extend beyond what is best for the company. He argues that if a corporate executive has a “social responsibility” in his capacity as a businessman, it would mean that he must act in some way that is not in the interest of his employers. For example, is he to refrain from increasing the price of his product to avoid inflation and contribute to a social objective when a price increase would be best for the corporation? Also, if he were to contribute to the social objective of reducing poverty, would it be best for the corporation to hire unemployed men instead of better qualified available men? In both these cases, Friedman argues, the corporate executive would be fruitlessly spending money that is not his own for a general social interest. If his actions to improve society raise the price of the product he would be spending the consumer’s money without their compliance. If such actions were to lower the wages of some employees, he would be spending their money. The corporate executive and all others involved in a corporation, if deciding to put the corporation’s funds towards social interest at the expense of the corporation’s interest would be essentially imposing taxes on his employees, customers, or stakeholders, and single-handedly decided where such taxes would go. Now this deepens the argument to go so far as to breach issues of political principals and overlaps governmental functions.
Milton Friedman presents a very strong argument in his published article. Based on the fundamental laws governing a corporation and its original purpose, it is hard to impose a social responsibility on it. However, this stance is dated and arguably obsolete at this time in history. Corporations in the 1970s relied more heavily on production and creation within the United States and from American workers. Exploitation of poorer, developing nations was not at the peak we are experiencing now. Also, the international attitude towards preserving the fragile balance of the Earth’s environment and global economy was not as prominent. He focuses on a specific example of corporate involvement in social perseverance: “I have, for simplicity, concentrated on the special case of the corporate executive…”(4). He neglected to speak of the moral responsibility of the stakeholders in a corporation and employees of a corporation. Also, Friedman preaches a free society; our government has not set up a free society for corporations and trade, so this defense is obsolete.
Joseph DesJardins, a business ethics professor, stands to argue the opposition to the original question of is increasing profits the only social responsibility of business in his entry in the 2005 Business and Professional Ethics Journal, titled “Business and Environmental Sustainability.” DesJardins’ strongest argument is that business in the 21st century must be practiced in a way that what he calls supports the three pillars of sustainability: economically vibrant, ecologically informed, and ethically sensitive. He demands this because, under his assumptions, “the earth’s biosphere is under significant threat to its ability to support life” and “the present configuration of economic and business activity…is incapable of adequately addressing these challenges and, in fact, is partially responsible for causing these problems” (36). These ominous assumptions should provide motivation to create a more just and environmental economic model. DesJardins insists that a new “sustainability” business model will better meet the needs of the present generation without jeopardizing the ability of future generations to meet their needs. Economically, this means primarily a shift in understanding that development, not really growth anymore, is positive economic activity. And that a shift in understanding that the possibility exists that what is right in terms of sustainability may also be right in terms of business performance (41). Entrepreneurs need to face the challenge of creating innovations that improve business and improve sustainable practices. Businesses should no longer only have a primary economic goal with ethical and environmental considerations an afterthought and constraint; the three pillars of business should all be in balance. In addition to a more balanced business model, DesJardin argues that business should take more responsibility for consumer behavior and consumption patterns than previously. Modern consumerism hurts sustainability: “this consumerist class consumes too much, it consumes the wrong things, and it consumes in the wrong ways” (45). Business does not create the market, it responds to it; however, consumers cannot demand what doesn’t exist and what they do not know about.
DesJardins’ argument is well fleshed out with not too much room for criticism. However, his argument suggests large fundamental changes in our business models that rely heavily on the morals of businessmen and their employers. Such a large change might be unfeasible and difficult to enforce. In his entire article, DesJardins neglects to explain how the changes to the business model and changes to the approach to consumerism will occur and be regulated. He puts significant blame on business for creating the consumer society that is affecting the environment in irreversible ways. By using the example of the high failure rate of new products, DesJardins suggests that “business is producing first and trying to find a market afterwards” (47). I believe that this statement falls more along the lines of an accusation rather than a fact-based statement.
Another position on this issue comes from an article in the October 2005 issue of Reason magazine. “Rethinking the Social Repsonibililty of Business” examines what Milton Friedman discussed in his 1970s article “The Social Responsibility of Business is to Increase Profits “ in relation to the corporation Whole Foods. John Mackey, the founder and CEO of Whole Foods, completely disagrees with Freidman’s main argument that businesses do not have social responsibility outside of making a profit. First off, he defends that a company has more important stakeholders than just investors; for Whole Foods there are customers, employees, vendors, communities, and the environment in addition to investors. Additionally, he defends that corporate philanthropy is good for business. It improves relationships between the community and the corporation and has the potential to reach a new pool of customers, both with work for the long-term benefit of the investors. The strongest argument I believe Joe Mackey presents is: “the entrepreneurs [of a company]… have the right and responsibility to define the purpose of the company.” The entrepreneurs created the company, brought together the factors of production, set the company strategy, and negotiated the terms of trade with all stakeholders. Now this is not to say that making a profit is not an important responsibility of a company, just that it is not the only responsibility. Furthermore, corporate philanthropy should be encouraged because human nature isn’t just about self-interest. According to Adam Smith, one of the fathers of free-market economics, in his book “The Theory of Moral Sentiments”, human nature includes sympathy, empathy, friendship, love, and the desire for social approval. Mackey suggests that the Whole Foods business model could represent a new form of capitalism, one that functions with a Utilitarian framework where positive results for society are a daily goal.
I think corporations do have much more responsibility than just producing a profit. As Joe Mackey so passionately expressed in his Whole Foods business model, the corporation has many more duties that extend beyond its investors. It is the responsibility of a business to take a proactive role in its product at all stages of development, beginning with production and ending with the breaking down of the product. There is too large of a disconnect between idea, creation, production, and use that makes it easy for companies to avoid responsibility on a sustainability front.
Professor Kim Fortun
Sustainability Problems
Fall 2011
Debate paper: Is increasing profits the only social responsibility of business?
The establishment of the corporation in America dates back to colonial expansion in the 1600s and 1700s. It was modeled after European corporations that defined corporations as a collection of individuals whose focus and business was of the public interest. By the early 19th century, corporations were still closely regulated by the states; forming a corporation required an act of legislature. At that time corporations were required to comply with the purposed expressed in their original charters. However a shift began to occur as many successful private firms avoided the corporate model: Andrew Carnegie formed his steel operation as a “limited partnership” for example. In 1819, the U.S. Supreme Court grated corporations a number of rights they had never previously recognized. The corporation was labeled an “artificial person” possessing both individuality and immortality. Also, pressured by new British laws, America voted to establish limited liability meaning that any corporation could enjoy limited liability on both contract and torn claims simply by registering as a “limited” company with the appropriate government agency. These new laws allowed corporations to retain huge profits due to business not benefiting specifically the public, but rather their direct, immediate stakeholders. Now, we come now the present day question: is increasing profits the only social responsibility of corporations and business? This question is becoming even more of a pressing issue in America due to low employment rates, decreasing income of the middle class, and loss of production within our borders. In a speech given by President Obama in February 2011, he says “Businesses have a responsibility, too…They should set up shop here and hire our workers, pay decent wages, and invest in the future of this nation. That’s their obligation” (thehill.com).
The infamous economist, Milton Friedman, in his 1970 New York Times Magazine article titled “The Social Responsibility of Business is to Increase Profits” preaches the affirmative; he believes that businesses and corporations have no social responsibility beyond making a profit. Friedman presents his argument on the basis of the existence of a free enterprise, private-property system. A free enterprise system allows business to be governed by the laws of supply and demand, not restrained by government interference, regulation, or subsidy (investorwords.com). He says that in such a system, the only responsibility a corporation, or rather its corresponding corporate executive, has is to its employers; that responsibility being to make as much money as possible while conforming to the basic rules of society. A business’ employers take the form of stakeholders, investors, a board of trustees, sponsors, etc. Friedman argues that a business cannot be considered a human person and therefore cannot be expected to uphold certain responsibilities; “only people have responsibilities” (1). With this being said, when the phrase “social responsibilities of business…” is used, Freidman assumes that businessmen, or more specifically the corporate executives, are the ones who hold that responsibility and such responsibility should not extend beyond what is best for the company. He argues that if a corporate executive has a “social responsibility” in his capacity as a businessman, it would mean that he must act in some way that is not in the interest of his employers. For example, is he to refrain from increasing the price of his product to avoid inflation and contribute to a social objective when a price increase would be best for the corporation? Also, if he were to contribute to the social objective of reducing poverty, would it be best for the corporation to hire unemployed men instead of better qualified available men? In both these cases, Friedman argues, the corporate executive would be fruitlessly spending money that is not his own for a general social interest. If his actions to improve society raise the price of the product he would be spending the consumer’s money without their compliance. If such actions were to lower the wages of some employees, he would be spending their money. The corporate executive and all others involved in a corporation, if deciding to put the corporation’s funds towards social interest at the expense of the corporation’s interest would be essentially imposing taxes on his employees, customers, or stakeholders, and single-handedly decided where such taxes would go. Now this deepens the argument to go so far as to breach issues of political principals and overlaps governmental functions.
Milton Friedman presents a very strong argument in his published article. Based on the fundamental laws governing a corporation and its original purpose, it is hard to impose a social responsibility on it. However, this stance is dated and arguably obsolete at this time in history. Corporations in the 1970s relied more heavily on production and creation within the United States and from American workers. Exploitation of poorer, developing nations was not at the peak we are experiencing now. Also, the international attitude towards preserving the fragile balance of the Earth’s environment and global economy was not as prominent. He focuses on a specific example of corporate involvement in social perseverance: “I have, for simplicity, concentrated on the special case of the corporate executive…”(4). He neglected to speak of the moral responsibility of the stakeholders in a corporation and employees of a corporation. Also, Friedman preaches a free society; our government has not set up a free society for corporations and trade, so this defense is obsolete.
Joseph DesJardins, a business ethics professor, stands to argue the opposition to the original question of is increasing profits the only social responsibility of business in his entry in the 2005 Business and Professional Ethics Journal, titled “Business and Environmental Sustainability.” DesJardins’ strongest argument is that business in the 21st century must be practiced in a way that what he calls supports the three pillars of sustainability: economically vibrant, ecologically informed, and ethically sensitive. He demands this because, under his assumptions, “the earth’s biosphere is under significant threat to its ability to support life” and “the present configuration of economic and business activity…is incapable of adequately addressing these challenges and, in fact, is partially responsible for causing these problems” (36). These ominous assumptions should provide motivation to create a more just and environmental economic model. DesJardins insists that a new “sustainability” business model will better meet the needs of the present generation without jeopardizing the ability of future generations to meet their needs. Economically, this means primarily a shift in understanding that development, not really growth anymore, is positive economic activity. And that a shift in understanding that the possibility exists that what is right in terms of sustainability may also be right in terms of business performance (41). Entrepreneurs need to face the challenge of creating innovations that improve business and improve sustainable practices. Businesses should no longer only have a primary economic goal with ethical and environmental considerations an afterthought and constraint; the three pillars of business should all be in balance. In addition to a more balanced business model, DesJardin argues that business should take more responsibility for consumer behavior and consumption patterns than previously. Modern consumerism hurts sustainability: “this consumerist class consumes too much, it consumes the wrong things, and it consumes in the wrong ways” (45). Business does not create the market, it responds to it; however, consumers cannot demand what doesn’t exist and what they do not know about.
DesJardins’ argument is well fleshed out with not too much room for criticism. However, his argument suggests large fundamental changes in our business models that rely heavily on the morals of businessmen and their employers. Such a large change might be unfeasible and difficult to enforce. In his entire article, DesJardins neglects to explain how the changes to the business model and changes to the approach to consumerism will occur and be regulated. He puts significant blame on business for creating the consumer society that is affecting the environment in irreversible ways. By using the example of the high failure rate of new products, DesJardins suggests that “business is producing first and trying to find a market afterwards” (47). I believe that this statement falls more along the lines of an accusation rather than a fact-based statement.
Another position on this issue comes from an article in the October 2005 issue of Reason magazine. “Rethinking the Social Repsonibililty of Business” examines what Milton Friedman discussed in his 1970s article “The Social Responsibility of Business is to Increase Profits “ in relation to the corporation Whole Foods. John Mackey, the founder and CEO of Whole Foods, completely disagrees with Freidman’s main argument that businesses do not have social responsibility outside of making a profit. First off, he defends that a company has more important stakeholders than just investors; for Whole Foods there are customers, employees, vendors, communities, and the environment in addition to investors. Additionally, he defends that corporate philanthropy is good for business. It improves relationships between the community and the corporation and has the potential to reach a new pool of customers, both with work for the long-term benefit of the investors. The strongest argument I believe Joe Mackey presents is: “the entrepreneurs [of a company]… have the right and responsibility to define the purpose of the company.” The entrepreneurs created the company, brought together the factors of production, set the company strategy, and negotiated the terms of trade with all stakeholders. Now this is not to say that making a profit is not an important responsibility of a company, just that it is not the only responsibility. Furthermore, corporate philanthropy should be encouraged because human nature isn’t just about self-interest. According to Adam Smith, one of the fathers of free-market economics, in his book “The Theory of Moral Sentiments”, human nature includes sympathy, empathy, friendship, love, and the desire for social approval. Mackey suggests that the Whole Foods business model could represent a new form of capitalism, one that functions with a Utilitarian framework where positive results for society are a daily goal.
I think corporations do have much more responsibility than just producing a profit. As Joe Mackey so passionately expressed in his Whole Foods business model, the corporation has many more duties that extend beyond its investors. It is the responsibility of a business to take a proactive role in its product at all stages of development, beginning with production and ending with the breaking down of the product. There is too large of a disconnect between idea, creation, production, and use that makes it easy for companies to avoid responsibility on a sustainability front.
Sources:
DesJardins, Joe. "Business and Environmental Sustainability." Business and Professional Ethics
Journal 24.1&2 (2005): 35-59. Web. <http://sustainabilityproblems.wikispaces.com/file/view/DesJardinsBusiness-and-Environmental-Sustainability.pdf>.
Friedman, Milton. "The Social Responsibility of Business Is to Increase Its Profits." The New York Times
Magazine 13 Sept. 1970: 1-6. Web. <http://sustainabilityproblems.wikispaces.com/file/view/FriedmanTheSocialResponsibilityofBusiness.pdf>.
"Rethinking the Social Responsibility of Business." Reason Magazine. Reason Magazine. Web. 03 Dec.
2011. <http://reason.com/archives/2005/10/01/rethinking-the-social-responsi/singlepage>.
"What Is Free Enterprise? Definition and Meaning." Investment and Financial Dictionary by
InvestorWords.com. InvestorWords.com. Web. 03 Dec. 2011. <http://www.investorwords.com/2085/free_enterprise.html>.
Yager, Jordy. "Obama: Businesses Have Responsibility to Help Economy Grow." The Hill. 05 Feb. 2011.
Web. <http://thehill.com/homenews/administration/142273-obama-businesses-have-responsibility-to-help-economy-grow>.